Vineyard and Nantucket Hospitals Move to Join Massachusetts General

Trustees at the Martha's Vineyard and Nantucket hospitals this
week announced their intention to join Massachusetts General Hospital
and its parent company, Partners Health Care, as affiliates by the end
of the year.

Trustees at each Island hospital have signed a memorandum of
understanding that is expected to lead to a definitive agreement. Final
approval must come from the Massachusetts Department of Public Health.
If the deal is concluded as anticipated, it will end an era of
independent nonprofit cottage hospitals on the two Islands that
stretches back for more than 80 years on the Vineyard and more than 90
years on Nantucket.

Under the terms of the agreement, Massachusetts General Hospital and
Partners Health Care will contribute $5 million to each Island hospital
for capital needs. For the Vineyard hospital this means the likely
completion of a $42 million capital campaign to build a new hospital,
the largest campaign in the history of the Island.

The affiliation deal is largely driven by finances, including a
complicated back story that involves the shift by the two Island
hospitals to critical access designation, which led to a Medicare
reimbursement ripple effect that has cost other Massachusetts hospitals
huge sums of money.

But hospital leaders said this week that the proposed affiliation,
which is not a merger, will have huge benefits on the clinical side as
well, opening up direct access to the full spectrum of medical services
at a world-class health care system with sophisticated, state-of-the-art
information technology and a teaching affiliation with Harvard Medical
School.

"Is this a leap of faith? Absolutely. Can I think of a better
institution in the country to take a leap of faith with? I cannot. Who
better to be in control of our health care?" said hospital vice
chairman Timothy Sweet this week.

"We have solidified the future of the hospital, and I cannot
think of any better way that you could assure the future of the
hospital," said hospital chief executive officer Tim Walsh.

Warren Spector, who is co-chairman of the Vineyard hospital's
capital campaign, said: "The way I think of it is we are striving
to take advantage of the knowledge, training and resources of a
world-class medical system, while at the same time keeping the
advantages we have of a well-run local institution. That to me is a
quality guarantee for people on the Island."

Under the terms of the agreement, each hospital will retain its own
governing board, name, and control of charitable contributions.

But, in the end, the proposed deal does mean a transfer of
ownership: Partners Health Care will own the hospital real estate, will
control the budget, and will retain final decision-making authority.
Partners will appoint 20 per cent of the board of trustees, while 80 per
cent will remain local. The memorandum of understanding for the Vineyard
hospital includes a stipulation that there will be no reduction in
current services, Mr. Sweet and Mr. Walsh said.

Mr. Sweet emphasized that the agreement is in its earliest stages,
and extensive due diligence lies ahead.

"This is the start of the deal," he said. "We are
going to be doing a lot of fact-finding to make sure this is right for
everyone.

Among other things, no exit clause has yet been crafted if either
hospital decides in the future that it wants to pull out of the
affiliation. Mr. Walsh said there is a provision in the memorandum of
understanding to discuss such a clause.

Mr. Sweet, Mr. Walsh and Mr. Spector said every large donor who has
pledged or given money to the capital campaign was contacted about the
pending agreement, and all have given it their blessing.

But Mr. Spector said the $5 million gift was in no way a deciding
factor. "It's nice to get some additional money for this,
but we're not doing this for short-term financial gain, because
otherwise we would just have raised the money," he said.

Begun 15 months ago, the capital campaign recently surpassed the $36
million mark. Mr. Spector said the $5 million gift would put the
campaign over the top of its goal, but he said if the agreement is
concluded and the gift then is made, any money beyond that used for the
campaign will go into a capital reserve fund.

"We want to get all the money raised (through signed pledges
and gifts) by the end of October," Mr. Spector said.

Mr. Walsh and Mr. Sweet said the memorandum of understanding has
been in the works since last summer, but the unusual financial situation
with Medicare has been known for much longer. The situation was
triggered when both Island hospitals achieved critical access status, a
special designation which allows small rural hospitals to receive
reimbursement for the actual cost of services. The 25-bed Vineyard
hospital was named a critical access hospital in 2003, and the 19-bed
Nantucket hospital followed suit a year later.

Ordinarily Medicare reimbursements are only for a portion of the
actual cost of services, and the formula used to determine reimbursement
includes an adjustment for wages.

In every state in the country, Medicare establishes what is termed
the rural floor for the wage index, Mr. Walsh said. In Massachusetts the
floor was established by the two rural Island hospitals, which have
higher wages due to a high cost of living.

Mr. Walsh and Mr. Sweet said that once both Island hospitals became
critical access hospitals, there were no more rural hospitals in the
state, and Medicare decided to use a national wage index in calculating
reimbursements. This caused the large hospitals to lose a staggering
amount of money - about $250 million - as a result of lower
reimbursements, Mr. Walsh said.

This created a strong incentive for the pitch from Partners Health
Care to acquire the two Island hospitals.

The Windemere Nursing Home and Rehabilitation Center, which is owned
by the hospital, will be included in the deal. Windemere loses money,
while the hospital has been operating comfortably in the black for the
last couple of years. Mr. Walsh said the critical access designation
opened the door to profitability, partly through the use of what are
termed swing beds in acute care.

Ironically, in order for the deal to be complete, one of the two
Island hospitals will have to give up its designation as a critical
access hospital.

Partners Health Care is a nonprofit consortium formed in 1994 when
Massachusetts General and Brigham and Women's hospitals joined.
Partners has since acquired other affiliates, including McLean Hospital,
Faulkner Hospital and Newton-Wellesley Hospital.

Both the Vineyard and Nantucket hospitals already have
collaborations with Massachusetts General in some medical specialties,
including cardiology, radiology, neurology and dermatology.

Mr. Sweet said he is conscious of the enormity of the decision for
the Island.

"It comes down to one word all the time and that is control
- are we going to lose our sense of identity, control and
autonomy? We have been thoroughly convinced that is not the case,"
he said, adding: "Partners' general philosophy is to allow
individual hospitals to operate as usual. And we think the potential for
rewards is huge. I know on the Vineyard we are very independent-minded,
but when you sit down and think about it, the hospital is right now
controlled by 15 trustees and really the ultimate control rests with the
Department of Public Health and the Massachusetts Attorney General.
Operations will not change at all." He also said:

"As far as where we are in the last few years -
we're only halfway to where we want to be. We went from a
dysfunctional institution to a well-run, well-managed hospital. But the
future for small rural hospitals appears to be in deep, deep trouble and
this is the best way to protect what we have. Having this backstop is
good, because as history has shown, we can lose our way pretty
easily."

Mr. Spector agreed. "The idea is not to change all the good
that has been done; the goal is not to take all the decisions out of the
hands of the people on Martha's Vineyard and give it to the people
in Boston. The goal is to take all the benefits of a world-class health
care system and give it to the people of the Vineyard. The
state-of-the-art technology system information is a valuable asset that
we could never build ourselves, and you cannot achieve without being an
affiliate because of privacy rules," he said, concluding:

"I understand that people on the Island will ask the question,
are we losing local control, are they not going to understand the needs
we have? I am convinced from the conversations I participated in with
Partners Health Care that all these things will turn out to be
advantages, not disadvantages."